Attachment 1 – Responses to the questions for respondents
(i) New Zealand-specific changes to tax advisory and tax planning services
Question 1. Do you agree that the provision of tax advisory and tax planning services to an audit client that is a PIE should be prohibited? (Refer NZ R604.15 – NZ 604.15 A1)
We note that this provision is intended to apply to audit and review clients that are public interest entities (PIEs). We agree with this change but consider that it does not go far enough. In our view, the prohibition on the provision of tax advisory and tax planning services (Part C of subsection 604 of the Code) should apply to all audit clients, review clients, and assurance clients, irrespective of whether the entity is a PIE.
The provision of tax advisory and tax planning services is in direct conflict with the audit and presents an unacceptable threat to audit independence. Tax advisory and tax planning work is intended to minimise the tax obligations on an entity. As a consequence, this work explores the boundaries of tax law and can result in arrangements that may be challenged by the tax authorities. This situation places the assurance practitioner firm in the intolerable position of justifying a tax position and advocating for the entity on one hand and in providing independent assurance on the entity’s financial statements on the other. This is a clear conflict of interest and threat to independence that cannot be adequately managed by safeguards.
The threats to independence are often greater for entities that are not PIEs. Those entities place much greater reliance on the tax expertise in the firm to give them confidence that their tax affairs are in order.
Question 2. Do you foresee any unintended consequences of this prohibition?
A consequence of this provision is that an assurance practitioner firm that is the registered tax agent of an audit or review client will need to request the entity to find another tax agent. This is not an unintended consequence but is a necessary step to ensure the assurance practitioner firm has no association with the audit or review client in the context of managing its tax affairs.
Question 3. Do you agree that advising an audit client in their tax return preparation or any adjustments arising therefrom is a form of tax advisory services? As such, consistent with the addition of NZ R604.15 such services would be prohibited for PIEs. (Refer NZ 604.11 A1)
We agree that advising an audit client in their tax return preparation or any adjustments arising therefrom (Part A of subsection 604 of the Code) is a form of tax advisory service. We note that this interpretation is limited to audit and review clients that are PIEs. As stated above, our view is that the prohibition on the provision of tax advisory and tax planning services should apply to all audit clients, review clients, and assurance clients, irrespective of whether the entity is a PIE.
The proposed Code allows an assurance practitioner to enter into engagements that are “related to the audit or review engagement” (para NZ600.14 A1). This would permit the assurance practitioner to engage with the audit client, review client, or assurance client to audit or review the tax return they have prepared for filing with the tax authorities.
The assurance practitioner needs to exercise considerable caution before they accept such engagements. They may unwittingly assume a management responsibility if the entity does not have personnel with the necessary understanding and experience of the applicable tax law to prepare a credible tax return. We suggest that the risk of assuming management responsibility is high in the context of auditing or reviewing tax returns prepared by the entity, and the Code should specifically draw attention to R600.7 of the Code, which prohibits an assurance practitioner from assuming management responsibility.
Question 4. Are there any other tax services contemplated by proposed subsection 604 for which you consider the requirements should be further strengthened and, if so, why?
We find it difficult to understand why the prohibition on the provision of tax advisory and tax planning services should be limited to audit and review clients that are PIEs. The independence threats apply equally, if not to a greater extent, to audit clients, review clients, and assurance clients that are not PIEs. Limiting of the prohibition to audit and review clients that are PIEs reveals an inconsistency in the application of independence in the Code, from both an application perspective and from a public understanding perspective, because the Code should set a single standard for independence across all entities and for all assurance engagements.
In addition, we are of the view that prohibitions should be extended to tax calculations for the purpose of preparing accounting entries (Part B of subsection 604 of the Code), to tax services involving valuations (Part D of subsection 604 of the Code), and to assistance in the resolution of tax disputes (Part E of subsection 604 of the Code). These prohibitions should apply to all audit and review clients and to all assurance clients.
(ii) Any other Non-assurance services
Question 5. The NZAuASB has not identified any further aspects of the IESBA’s provisions that need to be strengthened in New Zealand. We are, however, keen to hear whether stakeholders consider there is a need to further strengthen any specific provisions.
In principle, assurance practitioners should not be permitted to provide non-assurance services to audit clients, review clients, and assurance clients, irrespective of whether they are PIEs.
However, we consider that assurance practitioners should be able to assist a unique group of small entities, which we describe as “micro-entities”, to compile simple financial statements in accordance with the applicable financial reporting framework. Compilation involves using information derived from the entity’s trial balance or underlying records. Such a service would be permitted only when the entity does not have access to personnel with the knowledge to prepare the financial statements and does not have the financial resources to engage the necessary personnel. In this situation overall accountability is served because financial statements would not be prepared by these entities without the assurance practitioner’s assistance.
Apart from “compilation” engagements, additional engagements carried out by assurance practitioners should be limited to “work of an assurance nature”.
A deficiency in the Code is that it does not acknowledge the threats to independence when assurance practitioners enter into engagements with third parties that are unrelated to audit clients, review clients, and assurance clients. Such engagements can threaten independence in appearance.
(iii) Audit-related services
Question 6. Do you agree that additional services performed by the audit firm will generally not create a self-review threat to the firm’s independence when the services are related to the audit engagement?
It is the nature of the additional services that will determine whether a threat to independence arises, recognising that the threat is not necessarily limited to a self-review threat. The heading preceding 600.1 refers to “non-assurance services”. It follows that any service that falls outside this description is an “assurance engagement”. And the description “assurance engagement” captures the nature of an additional service that is very unlikely to threaten the independence of an assurance practitioner.
The description “audit-related service” is described as one that is related to the audit engagement. Without reading further, a service that is related to an audit engagement could be construed as any form of work (both assurance and non-assurance in nature) that directly relates to the subject matter of the audit. In an audit of financial statements such engagements could include valuations, the design and implementation of internal control systems, reconciliations, preparation of financial statements, and so on. In our view, the description of a service as “related to the audit” does not capture the nature of those services that would not threaten the independence of the assurance practitioner. However, “assurance” does describe the nature of a service that is unlikely to threaten independence and that is why the Auditor-General has chosen the term “work of an assurance nature”. In the Auditor-General’s independence requirements “work of an assurance nature” is defined more broadly than the narrow specification of “assurance engagement” in the glossary in the Code.
Question 7. Do you agree that the examples listed would not generally create a self-review threat to independence? Are there other types of services, that would generally not create a self-review threat to independence, that you consider need to be included as examples? (Refer NZ 600.14 A1)
We agree that the examples of engagements listed in NZ 600.14 A1 would generally not create a threat to independence. Other engagements that would complement the audit but that would not necessarily require the assurance provider to express an opinion might include:
- independent quality assurance of a project assessed against a generally accepted standard;
- reviews over the probity of processes;
- observation of the integrity of voting procedures;
- in-depth examination of processes or internal control systems that wouldn’t normally be considered as part of the financial statement audit; and
- effectiveness and efficiency audits.
Question 8. Do you agree that the additional application material emphasising the need to apply the conceptual framework to identify, evaluate and address threats to independence, other than the self-review threat, is helpful to ensure diligent application of the conceptual framework? (Refer NZ 600.14 A1)
We agree that the additional application material in NZ 600.14 A1 that emphasises the need to apply the conceptual framework to identify, evaluate, and address threats to independence, other than the self-review threat, is helpful to ensure diligent application of the conceptual framework. We make this comment while observing that the Code should be formulated to address the fundamental concerns expressed in the covering letter.
Question 9. Do you consider additional requirements or application material is needed in relation to audit-related services, to address perceptions of auditor independence? If yes, please provide details.
As noted in our covering letter, in our view the independence requirements of the Code are too complex to give the public confidence that assurance practitioners are independent in both fact and appearance.
(iv) Effective Date
Question 10. For engagements entered into before 15 December 2022, for which work has already commenced, the transitional provision provides that the firm may continue the engagement under the extant provisions of the Professional and Ethical Standard 1 for up to 12 months. Do you agree with the transitional provision? If not, please explain why not and what alternative you propose.
We agree with the transitional provisions.